June 1, 2012
Cyprus looks increasingly set to become the fourth euro-zone country to seek financial aid under Europe's temporary bailout fund, as early as this month, as it scrambles to protect its banking system from Greece's widening financial crisis that is threatening to engulf its tiny island neighbor.
The fallout from the Athens crisis already has forced Cyprus's second biggest bank to seek government support for a planned multibillion euro recapitalization, something that will push the island's public finances deep into the red and cause it to miss this year's budget targets.
Cyprus—faced with soaring bond yields hovering around 14% on the 10-year bond, and with its debt considered junk status by two of the world's leading ratings firms—has few places to turn to cover its financing needs.
Officially, the economy is expected to grow 0.8% this year, according to government projections, but the International Monetary Funds says a 1.2% contraction is more likely.
Late last year, the country negotiated a €2.5 billion ($3.1 billion) bilateral loan from Russia. Now, Cyprus is in talks with China for another bilateral loan, of an undisclosed amount, that looks unlikely to materialize in time.
In the past few days, Cypriot officials have been preparing public opinion by hinting that a bailout from the European Financial Stability Facility may be imminent, but without saying so directly. Finance Minister Vasos Shiarly told state-owned radio last week that "avoiding the EFSF is our No. 1 priority."
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